University of Pennsylvania Law School, Law & Economics Research Paper Serieshttp://papers.ssrn.com/sol3/JELJOUR_Results.cfm?form_name=journalBrowse&journal_id=164155The University of Pennsylvania Law School, Law & Economics Research Paper Series journal contains abstracts and papers from this institution focused on this area of scholarly research. To access all the papers in this series, please use the following URL: <a href="http://www.ssrn.com/link/penn-law-econ.html" target="new">http://www.ssrn.com/link/penn-law-econ.html</a>en-us2017-11-02 00:00:00.0https://www.ssrn.com/rss/SSRN RSS Generator 1.0editor@ssrn.comwebmaster@ssrn.comThe Modigliani-Miller Theorem at 60: The Long-Overlooked Legal Applications of Finance's Foundational Theoremhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=3053953<a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=17323" target="_blank">Michael S. Knoll</a><br />2018 marks the 60th anniversary of the publication of Franco Modigliani and Merton Miller’s <i>The Cost of Capital, Corporation Finance, and the Theory of Investment</i>. Widely hailed as the foundation of modern finance, their article, which purports to demonstrate that a firm’s value is independent of its capital structure, is little known by lawyers, including legal academics. That is unfortunate because the Modigliani-Miller capital structure irrelevancy proposition (when inverted) provides a framework that can be extremely useful to legal academics, practicing attorneys and judges.2017-10-17 14:45:46.0http://papers.ssrn.com/sol3/papers.cfm?abstract_id=3053953Reasonable Patent Exhaustionhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2995751<a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=23858" target="_blank">Herbert J. Hovenkamp</a><br />A lengthy tug of war between the Supreme Court and the Federal Circuit Court of Appeals may have ended when the Supreme Court held that the sale of a patented article exhausts the patentee seller’s rights to enforce restrictions on that article through patent infringement suits. Further, reversing the Federal Circuit, the parties cannot bargain around this rule through the seller’s specification of conditions stated at the time of sale, no matter how clear. No inquiry need be made into the patentee’s market power, anticompetitive effects, or other types of harms, whether enforcement of the condition is socially costly or valuable, or has a positive or negative impact on innovation. None of this is relevant.
Lexmark was attempting to use patent law to impose a variable proportion tie – in this case, a requirement that users of its printers also use its own original equipment toner cartridges. The general although not unanimous consensus is that such arrangements are economically beneficial, and largely everyone agrees that they are beneficial when the seller lacks market power, as Lexmark did in this case.
Impression Products reveals an economic deficiency that manifests all too frequently when patent law is brought to bear on market practices. Economic concepts such as market power or output effects which are commonly used in antitrust law are virtually unknown in patent law. This fact has inclined the courts to go to wild extremes – such as equating every patent with monopoly, or concluding that a patent is a mere property right and that anything done within the scope of the patent should therefore be permissible. The result, as in this case, can be draconian rules that are indifferent to effects on innovation, competition, economic efficiency, or any other measure seems relevant to innovation policy.
One thing the Supreme Court did not discuss is the Patent Misuse Reform Act, which provides that no patent owner shall be denied relief in an infringement action because it “conditioned…the sale of the patented product on the…purchase of a separate product…, unless…the patent owner has market power…” That language clearly creates an exception to the exhaustion rule for tying arrangements where the defendant lacks market power. This paper considers whether the Supreme Court was correct to ignore that statute.
The exhaustion rule also produces odd result of giving patentees an incentive to argue that components that they sell do not embody their own patents. If the product is not covered by a patent, then it is not exhausted. At this writing the issue is being litigated in the Apple v. Qualcomm dispute over Qualcomm’s post-sale restrictions on telecommunications components.
The Supreme Court based its patent exhaustion holding on concerns about restraints on alienation, which it presented as rooted in the common law. But the common law’s rules on restraints on alienation are much more complex than the Supreme Court acknowledged. The common law typically upheld restraints that were limited in time, and restraints enforced by patent infringement actions are by definition limited by the life of the patent.
This paper concludes by arguing that the Supreme Court would have been wise to develop a more nuanced exhaustion rule that examined actual effects likely to result from a particular restraint.2017-08-24 14:53:52.0http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2995751Horizontal Shareholding and Antitrust Policyhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=3046203<a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1555212" target="_blank">Fiona M. Scott Morton</a> and <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=23858" target="_blank">Herbert J. Hovenkamp</a><br />“Horizontal shareholding” occurs when one or more equity funds own shares of competitors operating in a concentrated product market. For example, the four largest mutual fund companies might be large shareholders of all the major United States air carriers. A growing body of empirical literature concludes that under these conditions market output in the product market is lower and prices higher than they would otherwise be.
Here we consider how the antitrust laws might be applied to this practice, identifying the issues that courts are likely to encounter and attempting to anticipate litigation problems. We assume that neither the mutual fund managers nor the firms in the product or service market are fixing prices in a way that would subject them to antitrust liability. Section 1 of the Sherman Act and §7 of the Clayton Act take quite different approaches to this problem, but each could be brought to bear. While the current literature on horizontal shareholding does not offer a single robust explanation of how the price increase mechanism works, we show that the “effects” test expressed in the Clayton Act does not require proof of the precise mechanism. Further, §7’s “solely for investment” exception typically will not apply. We also briefly discuss special problems of private plaintiff challenges. Finally, we elaborate the two ways that efficiencies are relevant to analysis of such mergers. First, we show why the efficiency defense as currently formulated will seldom or never save such a merger. Secondly we discuss the problem of remedial efficiencies, or mechanisms for ensuring that judicial relief will not impose its own consumer harm.2017-11-15 22:08:01.0http://papers.ssrn.com/sol3/papers.cfm?abstract_id=3046203Fiduciary Principles and Delaware Corporation Law: Searching for the Optimal Balance by Understanding that the World is Nothttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=3044477<a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=156312" target="_blank">Lawrence A. Hamermesh</a> and <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=328830" target="_blank">Leo E. Strine Jr.</a><br />This Chapter, forthcoming in the Oxford Handbook of Fiduciary Law, examines the principles that animate Delaware’s regulation of corporate fiduciaries. Distilled to their core, these principles are to: give fiduciaries the authority to be creative, take chances, and make mistakes so long as their interests are aligned with those who elect them; but, when there is a suspicion that there might be a conflict of interest, use a variety of accountability tools that draw on our traditions of republican democracy and equity to ensure that the stockholder electorate is protected from unfair exploitation.
After reviewing the evolution and institutional setting of the pertinent Delaware case law, the Chapter details how these principles have emerged in several high-salience contexts (the business judgment rule, controller freeze-outs, takeovers, and stockholder elections), and demonstrates that the identified principles aim to preserve the benefits of profit-increasing activities in a complex business world where purity is by necessity impossible. Further, the Chapter demonstrates that, even when a stricter approach to fiduciary regulation is warranted because of the potential for abuse, these principles hew to our nation’s republican origins and commitment to freedom in another way: when possible to do so, regulation of fiduciary behavior that might involve a conflict of interest should involve not after-the-fact governmental review, but before-the-fact oversight by the fiduciaries of the corporation who are impartial and, most importantly, by the disinterested stockholders themselves.2017-10-11 16:27:51.0http://papers.ssrn.com/sol3/papers.cfm?abstract_id=3044477